Adecoagro (NYSE:AGRO) gives investors direct exposure to the ups and downs of farming, and that hasn't been such a good thing over the past year. While nobody seems to seriously doubt that Argentina and Brazil will be major global breadbaskets for many years to come, results and sentiment have been dented by a significant drought and major political uncertainty in Argentina. Weather-related turbulence is a core risk to this company, but investors who can patiently stay focused on the long-term potential should consider these shares today.
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Weather and Hedging Take Their Toll
Adecoagro's first quarter results still showed the impact of La Nina-related drought across much of its farmland. Although planted acreage grew more than 20%, yield fell nearly 10% with major drops in corn and wheat. Pricing did improve though, and total farming and land transformation revenue rose about 27%. Overall revenue jumped about 86%, though, as the company saw a huge jump in recognized revenue from sugar, ethanol and energy.
Profitability was not great, however. Adjusted EBITDA plunged more than 80%, hurt in large part by losses tied to hedging.
SEE: A Clear Look At EBITDA
Will Argentina Play Fair?
Like Cresud (Nasdaq:CRESY), Adecoagro has suffered not only from the drought in South America, but also the political uncertainty in Argentina. The nationalization of YPF (NYSE:YPF) has spooked the market, and investors now worry that the Argentine government may also move to seize Adecoagro's substantial landbank in the country and/or impose substantial export tariffs to raise badly-needed revenue.
SEE: The Basics Of Tarriffs And Trade Barriers
I don't think these fears are entirely misplaced. Investors need only look at Venezuela or Zimbabwe to see how a feckless or corrupt government can devastate private landholders through arbitrary rule changes. That's particularly relevant in the case of land - land ownership is always a controversial topic in countries where there are substantial gaps between the wealthy landowners and the disenfranchised poor.
That said, it's hard to see how the Argentine government would benefit from such a move. There really isn't much clamor to seize land and give it to the people, and agriculture is one of the few sources of export earnings that the country can count on.
SEE: The Risks Of Investing In Emerging Markets
Ethanol Here and There, but Ag for the Long Haul
While Adecoagro is not as focused on, or exposed to, ethanol as Cosan (NYSE:CZZ), the outlook for ethanol is nevertheless a major component of Adecoagro's near-term future. If the U.S. government gets a little more rational (always a big "if") and welcomes Brazilian ethanol imports, this could be a major opportunity for Adecoagro, given Brazil's natural advantages in growing crops like sugarcane.
Even without major ethanol success, there's still an argument to own Adecoagro for its land and ag value. Brazil and Argentina are well-suited for crops and their acceptance of advanced seeds from companies like DuPont (NYSE:DD), should make them major global food suppliers. Likewise, Adecoagro's size not only gives it the capital to use advanced seeds and proper levels of fertilizer, but also modern equipment from the likes of Deere (NYSE:DE) or Agco (NYSE:AGCO) - a key advantage over many other emerging agriculture markets, where farming efforts are hampered by a lack of capital on the part of farmers.
SEE: What Is The Best Sector To Invest In Right Now
The Bottom Line
Putting a fair value on Adecoagro is no simple task. Investors can try to use methods like EBITDA/EV (and Adecoagro is undervalued today on this metric), but the extreme year-over-year volatility can make this a difficult metric to use. Likewise, while net asset value arguably has a firmer intellectual underpinning, there's a lot of guesswork that goes into an NAV number. That said, sell-side analysts are in general agreement that Adecoagro's NAV is the neighborhood of $14 to $16 per share, and that suggests a reasonably attractive value at today's price.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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